“At this critical time in the nation’s history, it’s imperative that our system of financial services regulation be improved to better protect investors, markets and the economy as a whole,” Crawford said during a hearing before the U.S. House Financial Services Committee. “While the recent financial crisis was the result of many failures, I am very proud to say that a failure of state securities regulation was not one of them.”

Crawford’s testimony focused on three proposals in the Investor Protection Act that are of utmost importance to individual investors: the establishment of a fiduciary duty for broker-dealers who provide investment advice, restricting mandatory pre-dispute arbitration and removing some of the hurdles facing private plaintiffs who seek damages for securities fraud.

Crawford said NASAA believes that investor protection will be strengthened if all who provide investment advice are held to the fiduciary duty that currently applies only to investment advisers. “Despite assertions to the contrary, the fiduciary duty applicable today to investment advisers is a single standard that requires the adviser to put a client’s interests ahead of its own at all times by providing advice and recommending investments that the adviser views as being the best for the client,” Crawford said. She also cautioned the panel that certain industry interests are actively promoting a new federal fiduciary standard that “is hardly the pro-investor fiduciary duty that has permeated investment adviser regulation for over four decades.”

In a related area, Crawford testified that the SEC Inspector General’s recent report on the agency’s handling of the Madoff Ponzi scheme investigation showed that the bulk of federally covered investment advisers are examined infrequently. “When examinations are conducted, the SEC has demonstrated a lack of understanding as to the business of these registrants. An ‘oversight gap’ exists,” Crawford testified. “NASAA members are fully prepared and equipped right now to fill this gap by accepting responsibility for the oversight of investment advisers up to $100 million in assets under management.”

Turning to arbitration, Crawford issued a strong call to end mandatory securities arbitration. “Today, virtually every broker-dealer includes in its customer agreements a predispute arbitration provision that forces public investors to submit all disputes that they may have with the firm and/or its associated persons to mandatory arbitration run by the securities industry,” she said. Crawford said investors deserve a choice between binding arbitration and civil litigation. “This choice should be solely that of the investor,” she said. “If arbitration really is fair, inexpensive and quick, as its adherents claim, then these benefits will prompt investors to choose arbitration. If, on the other hand, arbitration does not offer these advantages, then this mode of dispute resolution should not be forced upon the investing public.”

Crawford also testified that the rights of private plaintiffs to bring a private lawsuit for aiding and abetting should be restored by Congress, after being restricted by the Supreme Court in the Central Bank of Denver decision and basically eliminated by the Supreme Court in the Stoneridge Investment Partners decision. “If aiding and abetting liability is not restored by Congress, innocent victims of investment fraud will be left without a remedy against the entities or persons that assisted in perpetrating the fraud,” Crawford said.

Crawford noted that the Supreme Court has interpreted securities laws in a way that protects big business, emboldens secondary actors to engage in manipulative practices and sets an extremely high bar for defrauded shareholders to seek compensation from wrongdoers. “Corporations and secondary actors often seek short-term profits, big bonuses and large fees, and in too many instances these goals can be achieved by cooking the books or engaging in sham transactions,” she testified. “Given the complexity of corporate activity, secondary actors such as accountants and lawyers now play a critical in the preparation and dissemination of public information. If they are allowed to avoid liability for their actions, there will be no deterrent to prevent them from engaging in fraudulent schemes.”

Crawford also called for enhanced information sharing among state and federal regulators to ensure that investors are better protected, and she noted that the sharing of information by the industry’s self-regulatory organization “has been less than optimal.” “Claiming that the sharing of information implicates ‘state actor’ questions, the Financial Industry Regulatory Authority (FINRA), the industry’s self-regulatory organization, regularly declines to share information with government regulators about examinations and investigations,” Crawford said. “Barriers to sharing information create regulatory gaps and as we are all too aware, certain industry participants will exploit those gaps to the detriment of all investors.” Crawford said.

The complete text of Commissioner Crawford’s testimony is available here.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

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Bob Webster, Director of Communications
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